Wouldn’t it be nice if the IRS released its secret formula for how it selects individual tax returns for audit? That way, we’d do everything we could to stay under the radar and not be selected for further review.

Fewer than 1 percent of tax returns are audited, which is good news for all. But there’s no way to guarantee you’ll be exempt from the IRS’ prying eyes, so all you can do is take the proper precautions and hope for the best.

1. Shady preparers

If you don’t prepare your own return or take advantage of the free help that is available if you make $52,000 or less, chances are you will entrust someone else with your information to prepare your return. Just make sure the individual is legitimate, or you may end up in the IRS’ hot seat.

How do you spot a shady preparer? If they make ridiculous claims, like guaranteeing that all of their clients will get refunds, you definitely want to seek other options.

2. Business or hobby?

Have you been in business for at least three years and your tax return still reflects a loss? Chances are the IRS may view your business activity as a hobby, which is another red flag.

And if you used a Schedule C to claim your losses instead of incorporating, that also increases your chances of being placed under a microscope by the IRS.

So, what are you to do if your business is really losing money because it’s a startup or as a result of economic conditions? Take the deductions you are entitled to, but maintain adequate documentation to substantiate your claims.

3. Too much generosity

Perhaps 2013 was the year of giving, and you doled out large sums of cash that were disproportionate to your income? Your actions may raise a few eyebrows at Uncle Sam’s headquarters.

According to IRS Publication 526, charitable deductions are limited to 50 percent of your adjusted gross income, with 20 and 30 percent limitations applied in some cases. And if your individual contributions are $250 or more, you must keep a bank record showing the donation or a document that includes your name, the date the gift was given and the amount.

4. Cash earners beware

If you are employed in a position that works for tips, such as a bartender or restaurant server, it is important to understand that all tips received must be reported as income; it is against the law to do otherwise.

While it may be possible to understate income, the IRS has a certain threshold that it expects servers to meet, and any amount substantially less may raise a high level of concern, and possibly trigger an audit.

5. Typographical errors

Didn’t double-check your tax return for accuracy? The IRS may be coming for you if mistakes are present.

Common audit flags include incorrect Social Security numbers and employer identification numbers, transposed figures and mathematical errors on the face of the return. Word to the wise: Review your return carefully to ensure that the information you plan to submit matches the corresponding tax documents, as a simple mistake can land you on the audit list.

6. Unreported income

What the IRS has on file should match the face of your return, so refrain from omitting any form of income that you earned. And don’t assume that because the company didn’t give you a W-2 or a 1099 statement, you’re off the hook, because it more than likely wrote off the expense.

Having a hard time retrieving the documents? Give the company a ring. Still no luck? Call the IRS and I’m almost certain they’d be happy to assist.

7. Tax credits

Unfortunately, shady tax professionals can use tax credits to make good on fraudulent promises. For instance, improper use of the Earned Income Tax Credit amounts to more than $10 billion a year. The Wall Street Journal says:

The EITC’s complex rules help lead to high error rates by taxpayers and even paid preparers. It’s also vulnerable to fraudulent claims, despite some elaborate safeguards that have been built in over the years.

The Journal also says:

The IRS said in [a] statement Monday: “Every year, the IRS conducts 500,000 EITC audits as part of a broader enforcement strategy, and EITC claims are twice as likely to be audited as other tax returns.”

Of course, it’s OK to claim credits that you are indeed eligible for, but be sure to read the IRS guidance to ensure you qualify.

8. High income

Making more money may cause problems, at least from an audit risk perspective. CNBC says:

People who earn more than $1 million a year are more than 12 times more likely to be audited than people who earn $200,000 or less. About one of every eight tax filers making $1 million or more were audited in 2011 – double the rate of 2009.

But a new report says the IRS should be targeting the wealthy even more.

Check out this 2012 chart on CNNMoney about the chances of being audited broken down by income.

I’ve been selected for an audit. Help!

If the folks at the IRS decide you are the perfect candidate for an audit, take a deep breath and relax, as an audit does not mean you are doomed. Reply to the questions in their interview in the best manner possible, and use the documentation you have on hand as supporting evidence if requested.

Also, take a look at the IRS literature on audits along with this video to learn more about the process. And if you need assistance, be sure to complete the Request for Taxpayer Advocate Service Assistant, or Form 911.

If you’ve been audited by the IRS, let us know about your experience in the comments below or on our Facebook page.

Sign up for our free newsletter

Like this article? Sign up for our newsletter and we'll send you a regular digest of our newest stories, full of money saving tips and advice, free! We'll also email you a PDF of Stacy Johnson's "205 Ways to Save Money" as soon as you've subscribed. It's full of great tips that'll help you save a ton of extra cash. It doesn't cost a dime, so why wait? Click here to sign up now.

Comments & discussion

We welcome your opinions, but let’s keep it civil. Like many businesses, we reserve the right to refuse service to anyone. In our case, that means those who communicate by name-calling, racism, using words designed to hurt others or generally acting like an uninformed bully. Also, comments that include links to email addresses or commercial websites typically aren't posted. This isn't a place to advertise your business.

roselandis

One year I made a lot more money than usual. Turdbo showed we owed $13K!! Went to HR Blockhead only to be told the same thing! A co-worker told me to use a CPA who specializes in taxes. I had done a boatload of cleaning out closets, the attic, the garage, etc. and had the foresight to log every single piece. $400 later we found out we owed around $1100 NOT $13K. Unless you are single and renting you are crazy not to use a CPA who knows what they are doing. Get referrals from friends, co-workers, or upper management where you work. You’ll be glad you did.

Doreen-Les Hayward

Does tip #8 “High Income” really apply to the majority? Last time I checked those earning a million dollars were 0.01%.

Carol Wautlet

Yes, we were aufited in 2011 for 2009 tax year. Got a notice in August of 2011. AWFUL process! The biggest problem was that the IRS people seemed grossly negligent and didn’t understand their own tax law. It took a year to straighten everything out. First, we sent everything we had for receipts (make copies, never send originals). I sent it certififed mail (another clue). The first problem was that the address they listed to send everything to was not a recognized address. Had to call and get a different one. Next, we sent everything in and waited weeks to hear. We continued to get letters saying we owed over $5,000, the amount of our return that year. My husband called them EVERY Monday (I am not kidding) to check to see where things were. (You need to keep calling them, and keep a record of who you talked to, when you called, what was said, etc). When we called to ask why we still got letters, they said to ignore them, because they didn’t look over the file yet; they are computer generated. Then when we called again a couple of weeks later after getting another letter, we were told they never received anything from us. (This was about 2 months later.) I told them we have a receipt saying someone signed for the package. They then admitted they probably got it, but couldn’t find it, so we had to send again. (Incompetence!). Sent everything again. Waited weeks while getting more letters (always adding interest to original amount, so the amount grows) saying we still owed over $5,000. Weeks after that, (still we called them regularly to check on progress) they said they had an auditor working on it, but the auditor only scanned in some of the info, so not all of our credits applied, so our file was incomplete. Our file was transferred to a second auditor. Weeks later again, they said that auditor stopped working on our file. They actually implied that our file was large, complicated, and therefore, it was passed along to a third auditor assigned to review since the first two quit working on it, and didn’t enter in all of our info. After many months, many calls, many hours later (and threatening letters from them) we finally PERSEVERED. We got a letter in August of 2012 saying we owed zero. My husband works a commission only job, and has a lot of out of pocket expenses throughout the year, so there is a lot of receipts and expenses to track. It was VERY FRUSTRATING and time consuming.

But wait, there’s more. Our house burned in January 2013. And guess what? We got another audit letter in March of 2013 for tax year 2010. We don’t have anything to send them. We’ve told them that. We verified that our home burned. We continue to get lattters saying they will “reveiw our files and get back to us”, usually giving a date of a month or two later. Then when that date passes, we get another letter saying they’ll get back to us in another few months (with decision or request for more info, I guess). We’ve told them we don’t have receipts to send this time. They need COMPETENT people who complete work in a TIMELY manner. Still waiting, Stay tuned….